The Eighth Circuit Holds that the "Know Nothing" Defense Can Be Asserted Against a Securities Fraud Charge

The University of Nebraska is known for its tremendously powerful football program. It has less of a reputation for academic prowess. Which has been the inspiration for the following joke —

Question: What’s the N on the side of the Nebraska football helmet stand for?

Answer: Knowledge.

Admittedly, the joke works a little better when delivered orally.

The Eighth Circuit today reversed a Nebraska district court for discounting the importance of knowledge in a securities fraud case in United States v. Behrens. A bit of background is in order:

There is an odd sentencing provision that applies in securities cases. Under 15 U.S.C. section 78ff(a), if a person is convicted of an offense that uses section 78ff to define the offense’s penalty, and that offense relies on breaking a rule or regulation of the Securities and Exchange Commission, and the person can prove at sentencing that he had no knowledge of the rule, then, regardless of the fact that he was convicted of a crime, he cannot serve a sentence of imprisonment.

This is called the “Know Nothing” defense. Note, the Know Nothing defense is not really a defense — rather it’s a sentencing rule. It is a defense to having to serve time in prison, not to a conviction. (though, of course, avoiding prison is still tremendously valuable to someone faced with not avoiding prison)

Behrens was convicted, indeed, he plead guilty, to using the mail to fraudulently or deceptively contravene a rule of the SEC under 18 U.S.C. section 78j(b). He tried to assert the Know Nothing defense, but the district court said that it was not applicable to that securities fraud statute.

The Eighth Circuit looked at the statute and held that the deception has to subvert an SEC rule — the violation of the rule is, therefore, an element of the offense. Finding that the district court in Nebraska erred in its interpretation of the statute, the appeals court reversed.

Fear not, pro-government readers, Mr. Behrens will still have to prove his lack of knowledge on remand.

One interesting question is why the prosecutor didn’t simply require a plea to mail fraud to avoid this issue. Perhaps it had to do with giving law enforcement a securities fraud stat instead of a general fraud conviction Or maybe the U.S. Attorney’s Office in Nebraska was frustrated by the lack of 8th Circuit law on this question, and wanted to present it to the appeals court. If so, kudos to that office for structuring the plea in such a way as to allow the law to develop.

Perhaps the “N” stands for Nothing, in “Know Nothing”? For a list of other suggestions, please see the comments section on this post at a Nebraska Football fan site.